The Domestic Reverse Charge (DRC) is being introduced from 1 March 2021. The new reverse charge is the latest initiative to combat missing trader or carousel fraud that first appeared in relation to precious metals, computer chips and mobile phones. Due to both the Covid pandemic and preparations relating to Brexit, the introduction has been delayed twice but it appears that it will not be delayed a third time.
The DRC will affect businesses that:
- Buy or sell services that are ‘specified services’ that are reported within the Construction Industry Scheme (CIS)
- The supplier and the recipient are both registered for VAT in the UK
- The supply is standard rated or reduced rated.
- The supply is not to the end user or an intermediary
In June 2020, HMRC released their Revenue & Customs Brief 6 (2020) in respect of the VAT treatment of property search fees charged by solicitors and conveyancers.
This confirmed the withdrawal of the ‘postal concession’ from 1 December 2020. This concession allowed solicitors and conveyancers not to charge VAT on fees for property searches conducted by post, even where the disbursement conditions were not met. This is a further consequence of the VAT tribunal decision in Brabners LLP, where it was confirmed that electronic (online) search fees were not disbursements. This was because the searches in question were supplied to the law firm which then used them as part of its own overall supply of legal services to the client. In this situation the costs could not be treated as disbursements for VAT purposes.
You may find it helpful to have a reminder of the conditions for disbursements, as detailed in the VAT Notice 700.
You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:
- you acted as the agent of your client when you paid the third party
- your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
- your client was responsible for paying the third party (examples include estate duty and Stamp Duty payable by your client on a contract to be made by the client)
- your client authorised you to make the payment on their behalf
- your client knew that the goods or services you paid for would be provided by a third party
- your outlay will be separately itemised when you invoice your client
- you recover only the exact amount which you paid to the third party
- the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account
The difficulty for solicitors is that they may meet the cost of statutory charges on behalf of clients, act as co-ordinators in relation to client transactions or even incur costs themselves that they can attribute and recharge to clients. It is therefore important that solicitors carefully consider whether the disbursement conditions are met in each situation, should they wish to treat costs as disbursements when charging clients. Getting it wrong could prove costly.
If you would like further information about this topic, please contact Steve Forster, Indirect Tax Senior Manager on 01772 821 021 or email firstname.lastname@example.org
Tony Medcalf, tax partner at MHA Moore and Smalley, looks ahead to the budget on March 3 and the measures the Chancellor could put in place to support business recovery from the Covid-19 pandemic.
If I could ask one thing of the chancellor for the upcoming budget it would be a focus on tax relief schemes which encourage businesses to expand by investing in their own productivity. I believe the government should prioritise putting measures in place to help the UK economy grow out of the current financial situation, which will in turn help generate more tax revenue.
Prompting companies to invest in their own productivity could be done through extending capital allowances, such as the Annual Investment Allowance, or giving businesses better access to money to help them make these investments.
This could be through government-backed funding initiatives but also by better incentivising shareholders to invest money into their business.
I would also like to see targeted tax relief for business investment into certain areas. There is a lot of speculation about how the government will support the creation of a series of freeports across the UK which it is likely to link to the ‘levelling up’ agenda.
We may also see further government support for Enterprise Zones, which benefit from enhanced capital allowances.
This year’s budget could see an increase in capital gains tax. We could also see new taxes based around how long an asset is owned.
Speculation is also circulating about increases to corporation tax. While I believe it is currently more important to introduce measures which prompt business growth, if raising corporation tax is firmly on the government’s agenda it may be sensible to do this now, rather than avoid raising taxes during an election year.
Fuel duty is often a point of discussion when the budget comes around, and an increase in fuel duty would not be unreasonable this year. With less people currently using their cars, the government may see this as an opportunity to raise rates without much immediate impact.
For more analysis and comment visit our Budget Hub.
Prior to the end of the Transition Period on 31 December 2020, goods arriving in the UK from the EU were classed as acquisitions. From 1 January 2021, goods entering Great Britain (GB) and goods entering Northern Ireland (NI) from outside the EU are classed as imports, rather than acquisitions. Customs duty and import VAT may now be due when goods are imported into the UK. This importer of the goods is liable to pay these taxes and is identified by the EORI (Economic Operators Registration and Identification number) number entered on the import entry completed prior to the arrival of goods. As a UK based business you will need either a GB or NI EORI number, as appropriate, to allow goods to be cleared by HMRC.
Paying for import VAT
There are now two options on how import VAT is declared and reclaimed.
1) C79 – The C79 is the document issued by HMRC as evidence of the amount of import VAT paid in the preceding month. It is generated using your EORI. If you are the owner of the goods and entitled to recover VAT, you will use the C79 as evidence to recover the VAT paid to HMRC. HMRC will send you a C79 certificate in the post. This can take several weeks to arrive. The C79 should be retained within your VAT records as evidence of any input tax reclaim.
As you will have paid the import VAT and then must wait for the C79 to be received, this option will have cashflow implications.
2) Postponed VAT Accounting (PVA) – When PVA was originally announced in 2018, it was envisioned to be a temporary measure for 6 months in the event of “no deal Brexit”, but it is now a permanent measure.
As the importer of the goods, you will inform your Customs agent that you will be using PVA. To do this, your Customs agent will include CODE G at box 47e ‘Method of payment’ onthe customs form C88
When the goods are released, no import VAT will be charged. You will instead declare and reclaim the import VAT on your next VAT return.
You will need to register to receive PVA monthly statements. To register, you will require your Government Gateway user ID and password which is linked to your UK EORI number. The link below takes you to the Government Gateway to start the process of applying for monthly statements https://www.gov.uk/guidance/get-your-postponed-import-vat-statement. The monthly statements are not sent to you automatically, so should be retrieved each month. They are accessible for only 6 months, you should save/print these statements and retain them as part of your VAT records.
The statement will be available in the first half of the month and will provide import VAT information from the previous month.
On the VAT return covering the period in which the goods were imported, you should review the PVA monthly statements and enter the total import VAT for the period within box 1 and the net costs in box 7. You should also enter the amount of VAT you are entitled to reclaim on the import of goods in box 4.
The PVA provides a cashflow advantage in comparison to the payment of VAT at import and later recovery by using the C79 issued by HMRC.
On 31 December 2020, HMRC updated numerous VAT notices to help businesses prepare for the end of the Transition Period and our departure from the EU Single Market and Customs Union. One of the VAT notices updated by HMRC was 700/12 (How to fill in and submit your VAT Return). The updated guidance is summarised below and will of course also impact the VAT codes you use in accounting platforms such as QuickBooks, Xero or Sage. You can find further guidance on the VAT codes on their respective websites.
The most significant change from 1 January relates to the movement of goods between Great Britain (GB) and the European Union (EU), and the additional issues associated with the treatment of Northern Ireland (NI) as a territory within both the UK and the EU. The table below summarises these changes.
Postponed VAT Accounting and C79
For goods imported into GB and goods imported into NI from outside the EU, there are changes to the way a business can decide to account for and pay import VAT. You can find further information here.
VAT return boxes
There have been changes to the box titles on the UK VAT return. Although the VAT return retains its nine boxes, the transactions that are included within these boxes for supplies taking place after 31 December 2020 have changed. The precise nature of the changes also depends on whether the VAT registration includes business operations in NI.
Box 1 VAT due in the period on sales and other outputs
You should continue to include any VAT due to HMRC in box 1 of the VAT return. If you decide to utilise the cashflow benefit of Postponed VAT Accounting (PVA), the import VAT payable should be declared in box 1. Supplies of services within the reverse charge will continue to be declared in box 1.
Box 2 VAT due in the period on acquisitions of goods made in NI from EU Member States
From 1 January 2021, the only acquisitions you include in box 2 are acquisitions of goods from the EU to NI.
Box 3 total VAT due
This box will continue to be the total of boxes 1 and 2.
Box 4 VAT reclaimed in the period on purchases and other inputs (including acquisitions from the EU)
VAT to be reclaimed as input tax will continue to be entered in box 4. If you are declaring import VAT via PVA, you will also reclaim the import VAT on the same VAT return via box 4, to the extent your business is entitled to recover this VAT. If you are reclaiming import VAT using a C79 (the import VAT certificate issued by HMRC) , you will enter the import VAT amount stated on the C79 once received. Supplies of services within the reverse charge will continue to be reclaimed in box 4, again to the extent your business is entitled to recover this VAT.
Box 5 net VAT to pay to HMRC or reclaim
This box will continue to calculate the difference between boxes 3 and 4 to determine if a payment is due to or repayment is due from HMRC.
Box 6 total value of sales and all other outputs excluding any VAT
The net value of all supplies of goods and services should be included in box 6. This includes supplies of goods and/or services to both business customers and private individuals outside the UK.
Box 7 the total value of purchases and all other inputs excluding any VAT
The net value of all purchases of goods and/or services should be included in box 7. This includes reverse charge transactions.
Box 8 For all supplies of goods and related costs, excluding any VAT, to EU Member States made on or before 31 December 2020
Any supplies of goods up to 31 December 2020 by a UK business will be declared in box 8 and supplies of goods to EU business will be also declared on the EC sales list. Any supplies of goods by a GB business to the EU from 1 January 2021 will no longer be declared within box 8 and there is no longer a requirement to complete an EC sales list.
For supplies of goods and related costs, excluding any VAT, from NI to EU Member States made from 1 January 2021
From 1 January 2021, you will only enter the net amount in box 8 if you are a trading in NI and supply goods to EU Member States. Figures in this box must also be entered in box 6. You will also be required to complete an EC sales list.
Box 9 For acquisitions of goods and related costs, excluding any VAT, from EU Member States made on or before 31 December 2020
This will include the net cost of EU acquisitions (purchases) by a UK business up to 31 December 2020. Purchases of goods from outside GB will no longer be classed as acquisitions after 31 December 2020 and will not be declared in box 8.
For acquisitions of goods and related costs, excluding any VAT, from EU Member States to NI made from 1st January 2021.
From 1 January 2021, only acquisitions of goods from an EU Member State into NI will be entered in box 9. Figures in this box must also be entered in box 7.
Accounting systems VAT codes One of the most common questions from clients is what VAT code should be used on accounting systems like Xero, Sage and QuickBooks for sales of goods and services into and outside of the UK. Accounting systems have recently released updates detailing what codes should be input into systems for supplies of goods and services on or after 1 January 2021.
Our national tax team have worked together to create a handy Year End Tax Planning Guide, which is available for you to download for FREE. The guide is for individuals and companies and summarises some key tax and financial planning tips.
As we approach the end of the tax year, now is the time to review your tax affairs to ensure that you have taken advantage of all reliefs available to you and have considered some planning opportunities to help reduce your tax bill.
The guide covers the following topics:
- Brexit Planning
- Income Tax
- Capital Gains Tax
- Tax Favoured Investments
- Property Investment Businesses
- Inheritance Tax
- Corporation Tax
- Capital Allowances
- Enhanced Tax Reliefs
- Making Tax Digital
- Scottish Taxes
- Welsh Taxes
- Northern Irish Taxes
- Republic of Ireland Taxes
Get in touch
If you have any questions about any of the topics raised in the guide or if you would like some advice about your year end tax planning, please get in touch with a member of the tax team.
In September 2020, when Brexit seemed a distant event and we were still able to eat out at our favourite restaurant, HMRC released Revenue & Customs Brief (“RCB”) 12 (2020) titled “VAT early termination fees and compensation payments”. It followed two judgements of the Court of Justice of the European Union (CJEU). In these decisions, the CJEU held that when customers are charged to withdraw from agreements to receive goods or services, these “termination fees” are considered as further payment for the supply of goods or services to the customer. The fact that payments may be categorised as contractual penalties or compensation under national law was irrelevant. It follows that most early termination and cancellation fees are liable for VAT. The reason why this is significant is because HMRC had previously accepted that these charges were not in respect of a supply and therefore were outside the scope of VAT.
HMRC has now announced that it is revising RCB 12 (2020) and this revised guidance is expected shortly. HMRC have also confirmed that its guidance will be implemented from an as yet unspecified future date.
We understand that the revised RCB will, in broad terms, confirm that they consider that early termination and similar payments will be consideration for a supply if they form a cost component to the supplier of making the intended supply available or are broadly equivalent to what would have been charged for that supply. Where a charge is made which is provided for in a contract, but which is not directly linked to the intended supply, it will be outside the scope of VAT. However, we understand the RCB will specifically provide clarification in respect of dilapidations payments made under a contract for lease of a property, as detailed below.
These payments are further consideration for the supply where the work is to make good use permitted under the contract. There is a direct link between the payment and the supply, and there is reciprocity as the tenant has signed up to return the property in the condition they obtained it. If the tenant had gone beyond what was permitted under the contract then the charge to rectify this would be outside the scope. It would not be for the supply as the landlord had not agreed to the usage and so the necessary reciprocity would not exist.
Below are other examples of where VAT is likely to be applicable to payments.
- The contract is terminated but there is a clause in the contract requiring the customer to pay the remaining fees.
- There is no pre-existing right to terminate in the original contract for a taxable lease but both parties agree to a variation to the lease, setting out terms for early termination and a sum to be paid to the landlord as compensation.
- Early upgrade fees are a type of early termination fee and are treated in the same way.
- Lease agreements for moveable goods commonly include clauses that allow lessees to terminate early but to pay liquidated damages as a result. For example, vehicle finance leases that customers can cancel after an initial period of hire but, if so doing, must pay a termination fee to cover the loss of future rents.
- It is also possible for leases and other agreements to terminate early if a particular event occurs such as the customer breaching the terms of the lessor or an associate business calling in receivers. Contracts may say such events cancel their terms or effectively allow the lessor to terminate as though there had been a breach and require a fee to compensate the lessor.
We await the revised guidance but, in the meantime, HMRC has confirmed that businesses can either:
- continue to treat payments that fall within the RCB as further consideration for the contracted supply, or
- go back to treating them as outside the scope of VAT, if that is how they treated them before the RCB was issued.
If you would like further information about this topic, please contact Steve Forster on either 01772 821 021 or email email@example.com